Putting the Snap IPO into Historical Context

The Snap IPO has garnered a fair amount of coverage over the last two days so we thought we’d put some data behind the phenomenon. The most striking thing about the Snap IPO is clearly the valuation. Snap doesn’t have any earnings, but it does have a modicum of sales. After two days of trading Snap is fetching a price to sales multiple of a whopping 78x. How does that multiple compare to previous large IPOs and does that multiple tell us anything about future relative returns?

In the table below we show all the large (>$5bn) IPOs over the last decade that were valued at more than 10x sales after two days of trading. Here are a few observations:

  • There were only 20 such IPOs
  • Snap has the second highest price/sales multiple
  • The average  forward 1Y relative return was -5.7% (relative to the MSCI World Index)
  • The median forward 1Y return was -20.7%
  • Only 36% of the IPOs had a positive relative forward 1Y return
  • The correlation between the price/sales multiple and forward returns is only 46%

So while the odds that Snap puts up a good year following a strong first two days aren’t great, that possibility cannot be ruled out. Indeed, Twitter and LinkedIn managed to do just that even as Facebook stumbled. What’s more, there isn’t a great relationship between valuation and forward returns for these young companies.